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91+ essential trading terms explained in plain language. From basic concepts like pips and lots to advanced topics like algorithmic strategies and risk metrics.
Fundamental forex trading concepts
The ask price (also called the offer price) is the lowest price at which a seller is willing to sell a currency pair. It is the price at which you buy the base currency. The ask is always higher than the bid price.
The base currency is the first currency listed in a forex pair. In EUR/USD, the euro (EUR) is the base currency. When you buy a currency pair, you are buying the base currency and selling the quote currency. The exchange rate shows how much of the quote currency is needed to buy one unit of the base currency.
The bid price is the highest price a buyer is willing to pay for a currency pair. It is the price at which you can sell the base currency. The bid is always lower than the ask price, and the difference between them is the spread.
Cross pairs (or crosses) are currency pairs that do not include the US dollar. Popular crosses include EUR/GBP, EUR/JPY, GBP/JPY, and AUD/NZD. They typically have wider spreads than major pairs but can offer good trading opportunities.
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first currency is the base currency and the second is the quote currency. Major pairs include EUR/USD, GBP/USD, USD/JPY. Cross pairs don't include USD, such as EUR/GBP or AUD/JPY.
Exotic pairs consist of one major currency paired with a currency from a developing economy (e.g., USD/TRY, EUR/ZAR, GBP/SGD). They have wider spreads, lower liquidity, and higher volatility compared to majors and crosses.
A lot is a standardized unit of measurement for a forex transaction. A standard lot equals 100,000 units of the base currency. A mini lot is 10,000 units, a micro lot is 1,000 units, and a nano lot is 100 units. Lot size directly affects the pip value and therefore the potential profit or loss of a trade.
Major currency pairs are the most traded forex pairs in the world, all containing the US dollar. The seven majors are: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD. They offer the highest liquidity, tightest spreads, and most trading volume.
A pip (Percentage in Point) is the smallest price move in a forex quote. For most currency pairs, a pip equals 0.0001 (the fourth decimal place). For JPY pairs, a pip is 0.01 (the second decimal place). Pips are the standard unit for measuring price changes and calculating profit or loss in forex trading. For example, if EUR/USD moves from 1.1050 to 1.1055, that's a 5-pip move.
A pipette is one-tenth of a pip, representing the fifth decimal place in most currency pairs (0.00001) or the third decimal place for JPY pairs (0.001). Many modern brokers quote prices in pipettes for more precise pricing. Also known as a fractional pip or point.
The quote currency (or counter currency) is the second currency in a forex pair. In EUR/USD, the US dollar (USD) is the quote currency. It represents the amount of that currency needed to purchase one unit of the base currency.
The spread is the difference between the bid price (sell) and the ask price (buy) of a currency pair. It represents the broker's fee and is measured in pips. Tighter spreads mean lower trading costs. Spreads can be fixed or variable depending on the broker and market conditions. Major pairs like EUR/USD typically have the tightest spreads.
Core trading terminology
A carry trade involves borrowing a currency with a low interest rate and investing in a currency with a higher interest rate, profiting from the interest rate differential (swap). It is a long-term strategy that works best in stable market conditions.
Leverage allows traders to control a large position with a relatively small amount of capital. Expressed as a ratio (e.g., 1:100, 1:500), it means that for every $1 of margin, you can control $100 or $500 worth of currency. While leverage amplifies potential profits, it equally magnifies potential losses. Brokers set maximum leverage limits, and regulations vary by jurisdiction.
Liquidity refers to how easily a currency pair can be bought or sold without causing a significant price change. Major pairs like EUR/USD are highly liquid with tight spreads. Higher liquidity generally means faster execution and less slippage. Liquidity varies throughout the day based on market sessions.
Going long means buying a currency pair, expecting the base currency to appreciate against the quote currency. If EUR/USD is at 1.1000 and you go long, you profit when the price rises above 1.1000.
Margin is the amount of money required to open and maintain a leveraged trading position. It is not a fee but a portion of your account equity set aside as collateral. Free margin is the available equity that can be used to open new positions. Used margin is the amount locked in open positions.
A margin call occurs when your account equity falls below the required margin level, typically at 100% or 50% depending on the broker. The broker will notify you to either deposit more funds or close positions to restore the margin level. If the equity continues to drop, the broker may automatically close positions (stop-out).
Going short means selling a currency pair, expecting the base currency to depreciate against the quote currency. If EUR/USD is at 1.1000 and you go short, you profit when the price falls below 1.1000.
Slippage occurs when a trade is executed at a different price than expected. It happens during periods of high volatility or low liquidity, especially during news events. Slippage can be positive (better price) or negative (worse price). Using limit orders instead of market orders can help reduce slippage.
The stop-out level is the margin level at which the broker automatically begins closing your open positions to prevent further losses. Typically set at 20-50% margin level. Positions are closed starting from the one with the largest loss.
A swap or rollover is the interest rate differential between the two currencies in a pair, charged or credited to your account when you hold a position overnight. Swap can be positive (you earn) or negative (you pay). Swap-free accounts (Islamic accounts) are available for traders who cannot receive or pay interest.
Volatility measures the degree of price fluctuation over a given period. High volatility means larger price swings and potentially more profit opportunities but also higher risk. Volatility is often measured using indicators like ATR (Average True Range) or Bollinger Bands. News events, economic releases, and session overlaps increase volatility.
Chart patterns, indicators, and analysis methods
ATR is a volatility indicator that shows the average range of price movement over a specified period (typically 14). It doesn't indicate direction, only the degree of price volatility. ATR is commonly used to set stop-loss levels, position sizing, and identifying volatility breakouts.
Bollinger Bands consist of a middle band (SMA 20) and two outer bands placed 2 standard deviations above and below. They measure volatility -- bands widen during high volatility and narrow during low volatility (squeeze). Price touching the upper band may indicate overbought conditions; touching the lower band may indicate oversold.
A breakout occurs when price moves above resistance or below support with increased volume. Breakout trading involves entering a position when price breaks a key level, expecting the momentum to continue. False breakouts (fakeouts) occur when price briefly breaks a level but quickly reverses.
A candlestick chart displays price data using candle-shaped bars showing open, high, low, and close prices for a time period. A bullish (green/white) candle closes higher than it opens; a bearish (red/black) candle closes lower. Candlestick patterns like Doji, Hammer, and Engulfing are used to predict reversals.
A death cross is a bearish signal that occurs when a short-term moving average (typically SMA 50) crosses below a long-term moving average (typically SMA 200). It suggests the beginning of a major downtrend.
Divergence occurs when price moves in the opposite direction of a technical indicator (e.g., RSI, MACD). Bullish divergence: price makes lower lows while the indicator makes higher lows (potential upward reversal). Bearish divergence: price makes higher highs while the indicator makes lower highs (potential downward reversal).
A Doji is a candlestick pattern where the opening and closing prices are virtually equal, creating a cross or plus sign shape. It signals market indecision and potential reversal. Types include Standard Doji, Dragonfly Doji, Gravestone Doji, and Long-Legged Doji.
The EMA is a type of moving average that places more weight on recent prices, making it more responsive to new information than the SMA. Commonly used periods include EMA 9, 21, 50, and 200. EMAs are popular for short-term trading signals and trend identification.
Fibonacci retracement uses horizontal lines at key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) to identify potential support and resistance areas. These levels are drawn between a significant high and low point on a chart. The 61.8% level (golden ratio) is considered the most significant.
Fundamental analysis evaluates a currency's value by examining economic, financial, and geopolitical factors. Key data includes GDP, interest rates, inflation, employment figures, and central bank policies. Fundamental traders focus on economic news releases and macroeconomic trends.
A golden cross is a bullish signal that occurs when a short-term moving average (typically SMA 50) crosses above a long-term moving average (typically SMA 200). It suggests the beginning of a major uptrend and is widely followed by traders.
MACD is a trend-following momentum indicator showing the relationship between two EMAs (typically 12 and 26 periods). The MACD line minus the signal line (9 EMA of MACD) generates buy/sell signals. When MACD crosses above the signal line, it's bullish; below is bearish. The histogram visualizes the difference between the two lines.
A moving average smooths out price data by calculating the average price over a specified period. The Simple Moving Average (SMA) gives equal weight to all prices; the Exponential Moving Average (EMA) gives more weight to recent prices. Common periods are 20, 50, 100, and 200. MAs are used to identify trends, support/resistance, and crossover signals.
An oscillator is a technical indicator that moves between fixed boundaries (e.g., 0-100), helping identify overbought and oversold conditions. Common oscillators include RSI, Stochastic, and CCI. They are most effective in ranging markets.
A market condition where a security has risen significantly and rapidly, potentially beyond its fair value. Indicators like RSI above 70 or Stochastic above 80 suggest overbought conditions. It may signal an upcoming pullback or reversal, though strong trends can remain overbought for extended periods.
A market condition where a security has fallen significantly and rapidly, potentially below its fair value. Indicators like RSI below 30 or Stochastic below 20 suggest oversold conditions. It may signal an upcoming bounce or reversal.
RSI is a momentum oscillator that measures the speed and magnitude of price changes on a scale of 0 to 100. RSI above 70 suggests overbought conditions (potential reversal down); below 30 suggests oversold (potential reversal up). The standard period is 14. RSI divergence with price can signal trend weakness.
The SMA calculates the average price over a specific number of periods, giving equal weight to each price point. SMA 200 is widely watched as a long-term trend indicator. When price crosses above the SMA, it may signal an uptrend; below signals a downtrend.
The Stochastic oscillator compares a closing price to its price range over a given period. It produces two lines (%K and %D) ranging from 0-100. Readings above 80 indicate overbought, below 20 indicate oversold. Crossovers between %K and %D generate trading signals.
Support is a price level where buying pressure is strong enough to prevent further decline. Resistance is where selling pressure prevents further rise. These levels are identified using historical price data, trend lines, moving averages, and Fibonacci retracements. When price breaks through support or resistance, it often signals a trend continuation.
Technical analysis is a method of evaluating markets by analyzing price charts, patterns, and statistical indicators. It assumes that price movements follow trends and that history tends to repeat itself. Common tools include moving averages, RSI, MACD, and support/resistance levels.
A trend is the general direction of a market or asset's price over time. An uptrend (bullish) has higher highs and higher lows. A downtrend (bearish) has lower highs and lower lows. A sideways trend (range) shows no clear direction. 'The trend is your friend' is a fundamental trading principle.
A trend line is a straight line drawn on a chart connecting two or more price points, used to identify the direction and strength of a trend. An uptrend line connects higher lows; a downtrend line connects lower highs. The more times price touches a trend line without breaking it, the stronger it is.
Volume represents the total number of shares or contracts traded during a given period. In forex, tick volume (number of price changes) is used as a proxy since there's no centralized exchange. High volume during a price move confirms the strength of the move.
MetaTrader and trading software terms
Backtesting is the process of testing a trading strategy using historical market data to evaluate its performance. In MetaTrader, the Strategy Tester simulates trades based on past data. Key metrics include profit factor, max drawdown, win rate, and total profit. Backtesting helps validate strategies before risking real money, though past results don't guarantee future performance.
A demo account is a simulated trading account funded with virtual money, allowing traders to practice without financial risk. It uses real-time market data and replicates live trading conditions. Ideal for testing strategies, learning platforms, and evaluating Expert Advisors before live trading.
An Expert Advisor is an automated trading program written in MQL4 or MQL5 that runs on the MetaTrader platform. EAs can analyze markets, place trades, manage positions, and execute complete trading strategies without manual intervention. They follow predefined rules and algorithms, eliminating emotional trading decisions.
A forex indicator is a mathematical calculation based on price, volume, or open interest data that generates visual signals on charts. Indicators help traders identify trends, momentum, volatility, and potential entry/exit points. They can be leading (predictive) or lagging (confirming). Custom indicators can be created in MQL for MetaTrader.
Forward testing (or paper trading) runs a strategy on a demo account with live market data in real-time to validate backtesting results. It accounts for real-world factors like slippage, spread variations, and execution delays that backtesting may miss.
MetaTrader 4 is the most widely used forex trading platform, developed by MetaQuotes Software. It supports Expert Advisors written in MQL4, custom indicators, scripts, and backtesting via the Strategy Tester. MT4 offers charting tools, multiple order types, and a built-in marketplace for trading tools.
MetaTrader 5 is the successor to MT4, supporting more asset classes (stocks, futures, options alongside forex), more timeframes, a built-in economic calendar, DOM (Depth of Market), and improved backtesting with multi-currency strategy testing. It uses MQL5 programming language.
MQL is the programming language used to create Expert Advisors, custom indicators, scripts, and libraries for MetaTrader platforms. MQL4 is used for MT4 and MQL5 for MT5. It is a C++-like language specifically designed for developing trading algorithms and technical analysis tools.
A script is a program that runs once to perform a specific task in MetaTrader, unlike an EA which runs continuously. Scripts can close all open orders, place pending orders, calculate lot sizes, or perform other one-time operations. They are written in MQL4/MQL5.
The Strategy Tester is MetaTrader's built-in backtesting tool. It simulates an EA's performance using historical data with different modeling modes: every tick (most accurate), 1-minute OHLC, and open prices only (fastest). MT5's tester supports multi-currency and multi-timeframe testing.
A timeframe defines the period each candlestick or bar represents on a chart. Common timeframes include M1 (1 minute), M5, M15, M30, H1 (1 hour), H4, D1 (daily), W1 (weekly), and MN (monthly). Scalpers use lower timeframes (M1-M15); swing traders use H4-D1; position traders use D1-MN.
A VPS is a remote server that runs your MetaTrader platform 24/7 without interruption. Essential for Expert Advisors that need continuous operation. Benefits include low latency to broker servers, uninterrupted power and internet, and no need to keep your computer running. Popular VPS providers offer MetaTrader-optimized plans.
Risk assessment and money management
Account balance is the total amount of money in your trading account after all closed trades but not accounting for open positions. It changes only when positions are closed. Equity = Balance + Floating P/L.
Drawdown is the peak-to-trough decline in account equity, expressed as a percentage. Maximum drawdown is the largest percentage drop from a peak before a new peak is reached. It is a critical risk metric for evaluating trading strategies and Expert Advisors. A 50% drawdown requires a 100% gain to recover, making low-drawdown strategies preferable.
Equity is the current value of your trading account, calculated as Balance + Unrealized Profit/Loss. It fluctuates with open positions. Equity determines your available margin and margin level. When equity drops below the required margin, a margin call occurs.
Free margin is the amount of money in your account that is available to open new positions. Calculated as Equity minus Used Margin. If free margin drops to zero, no new positions can be opened.
Position sizing determines how much capital to allocate to a single trade, usually based on risk percentage per trade (e.g., risking 1-2% of account balance). Proper position sizing protects against large losses and is fundamental to money management. The Kelly Criterion and fixed fractional methods are common sizing approaches.
Profit factor is the ratio of gross profit to gross loss. A profit factor above 1.0 means the strategy is profitable. Values above 1.5 are considered good; above 2.0 is excellent. It is one of the most important metrics for evaluating trading system performance. Profit Factor = Total Winning Trades / Total Losing Trades.
The risk-reward ratio compares the potential loss (risk) to the potential profit (reward) of a trade. A 1:2 ratio means risking $1 to potentially gain $2. Professional traders typically aim for at least 1:1.5 or 1:2. Combined with a win rate above 50%, favorable risk-reward ratios lead to long-term profitability.
The Sharpe ratio measures risk-adjusted return by dividing the excess return of an investment over the risk-free rate by its standard deviation. A higher Sharpe ratio indicates better risk-adjusted performance. Values above 1.0 are acceptable; above 2.0 is very good; above 3.0 is excellent.
Win rate is the percentage of trades that are profitable. A 60% win rate means 6 out of 10 trades are winners. However, win rate alone doesn't determine profitability -- it must be considered alongside the risk-reward ratio. A strategy with 40% win rate but 1:3 risk-reward can be more profitable than 70% win rate with 1:0.5.
Types of trading orders
A limit order is set to buy below or sell above the current market price. A buy limit is placed below the current price (expecting a bounce); a sell limit is placed above (expecting a reversal). Limit orders guarantee the execution price but not execution itself.
A market order is an instruction to buy or sell immediately at the current market price. It guarantees execution but not the exact price, as slippage may occur during volatile markets. Market orders are the simplest and most common order type.
A pending order is an instruction to open a position when the price reaches a specified level. Types include buy limit, sell limit, buy stop, and sell stop. MT5 also supports buy stop limit and sell stop limit. Pending orders allow you to enter the market at precise price levels without monitoring charts constantly.
A stop loss is an order placed to automatically close a position at a predetermined loss level, limiting potential losses. It is the most important risk management tool. Trailing stop losses move automatically with favorable price action to lock in profits. Every trade should have a stop loss.
A stop order (or stop entry order) is placed above or below the current price. A buy stop is above the current price (expecting a breakout); a sell stop is below (expecting a breakdown). Once the price reaches the stop level, it becomes a market order.
A take profit order automatically closes a position when it reaches a specified profit level. It removes the emotional aspect of deciding when to exit a winning trade. Combined with stop loss, it defines the complete risk-reward profile of a trade.
A trailing stop is a dynamic stop loss that moves with the price in your favor, maintaining a fixed distance. If the price reverses by the trailing amount, the position is closed. It allows you to lock in profits while letting winners run. Available as a built-in MetaTrader feature or coded in EAs.
Algorithmic and manual strategy types
Algorithmic trading uses computer programs to execute trades based on predefined rules and mathematical models. It eliminates emotional decisions, enables faster execution, and can process multiple markets simultaneously. Expert Advisors on MetaTrader are a form of algorithmic trading accessible to retail traders.
A breakout strategy enters trades when price breaks through established support or resistance levels with increased momentum. Traders look for consolidation patterns (triangles, channels, rectangles) and enter when the price breaks out. Volume confirmation and false breakout filters improve success rates.
Copy trading (or social trading) allows traders to automatically replicate the trades of experienced traders. Platforms like MQL5 Signals, ZuluTrade, and eToro offer copy trading services. Followers select signal providers based on their track record, risk profile, and trading style.
Currency correlation measures how two currency pairs move in relation to each other. Positive correlation (e.g., EUR/USD and GBP/USD) means they tend to move in the same direction. Negative correlation (e.g., EUR/USD and USD/CHF) means opposite directions. Understanding correlation helps diversify risk and avoid doubling exposure.
Day trading involves opening and closing all positions within the same trading day, avoiding overnight risk and swap charges. Day traders analyze intraday charts (M5-H1) and make multiple trades daily. It requires active monitoring and disciplined risk management.
Grid trading places multiple buy and sell orders at regular intervals above and below a set price, creating a grid. It profits from market oscillation within a range. Grid EAs automatically manage the grid of orders. Risk: in strongly trending markets, one side of the grid accumulates large losses requiring careful money management.
Hedging involves opening opposing positions to reduce risk exposure. In forex, you might go long EUR/USD and long USD/CHF (since they're negatively correlated). Direct hedging opens buy and sell on the same pair simultaneously (supported on MT5 hedge accounts). It limits both losses and profits.
HFT is a subset of algorithmic trading that executes a very large number of orders at extremely high speeds (milliseconds). It requires specialized hardware, co-located servers, and direct market access. HFT is primarily used by institutional traders and is not practical for retail traders on MetaTrader.
Martingale is a position-sizing strategy that doubles the lot size after every losing trade to recover all previous losses with one winning trade. While mathematically sound in theory, it carries extreme risk of account blow-up during extended losing streaks. Anti-martingale (reverse) increases size after wins instead.
Mean reversion assumes that prices tend to return to their average over time. When price deviates significantly from its mean (measured by Bollinger Bands, RSI, etc.), traders enter positions expecting a return to the mean. It works best in ranging markets and for pairs with established trading ranges.
News trading involves taking positions based on economic news releases and events (NFP, interest rate decisions, GDP). Traders either straddle before news (placing pending orders in both directions) or react quickly after the release. High volatility and slippage are common during news events.
Price action trading analyzes raw price movements without relying on indicators. Traders use candlestick patterns, chart formations, support/resistance, and trend lines to make decisions. It emphasizes reading the 'story' of the chart and understanding market psychology through price behavior alone.
Range trading identifies support and resistance levels in a sideways market and buys at support while selling at resistance. It works best when markets are not trending. Oscillators like RSI and Stochastic help confirm range-bound conditions.
Scalping is a high-frequency trading strategy that aims to profit from very small price movements. Scalpers open and close many trades within minutes, targeting 5-20 pips per trade. It requires fast execution, tight spreads, and high concentration. Scalping EAs automate this process with precise entry/exit rules.
Swing trading aims to capture medium-term price moves over days to weeks. Swing traders use H4 and D1 timeframes, focusing on trend changes, pullbacks, and breakouts. It requires less screen time than scalping or day trading but involves overnight and weekend risk.
Trend following is a strategy that enters trades in the direction of the prevailing trend and exits when the trend reverses. It uses indicators like moving averages, MACD, and ADX to identify and confirm trends. Trend-following EAs are popular for their simplicity and effectiveness in trending markets.